The tax department cannot issue a direct demand against the assessee for tax deducted but not remitted by the deductor
The biggest problem faced by some of the taxpayers today is the mismatch between the tax deducted at source (TDS) and what is remitted to the government by the deductor as shown in Form 26AS of the Income Tax website.
If the tax deductor does not remit the tax deducted at source to the government, for whatever reasons, what is the recourse available to the tax payer? The taxpayer can do nothing but stare at the inscrutable ways of tax collection by the government. There are several corporates who deduct tax from the salary of their employees, but fail to remit the same to the government and then go bankrupt. How do you tackle this menace? As per Section 199 of the Income Tax act, credit for TDS is given to the tax payer only if it is paid in to the central government account.
However, under another section 205 of the Income tax act, it is clearly stipulated that where tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income. Obviously, it means once the tax is deducted from your income, even if it is not remitted to the government, by the deductor, you should get credit to that extent. The relevant sections read as under:
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Section - 199, Income-tax Act, 1961 - Credit for tax deducted.
“199. (1) Any deduction made in accordance with the foregoing pro-visions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of property or of the unit-holder, or of the shareholder, as the case may be.
(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.
(3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules9 as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.”
Section - 205, Income-tax Act, 1961-2015 - Bar against direct demand on assessee.
205. Where tax is deductible at the source under the foregoing provisions of this Chapter, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”
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The Central Board of Direct Taxes (CBDT) has on 1st June, 2015 issued a clarification to the Income Tax officials that in view of Sec.205 of the Act, that demand on account of tax credit mismatch cannot be enforced coercively and that the assessees are not put at any inconvenience on account of default of deposit of tax into the government account by the deductor.
The copy of the CBDT directive dated 1 June 2015 is reproduced here below:
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No. 275/29/2014-IT-(B)
Government of India
Ministry of Finance
Central Board of Direct Taxes
Dated New Delhi, the 1st June, 2015
To,
The CCsIT (CCA)
Subject: Non-deposit of Tax Deducted at Source – regarding.
Sir/Madam,
Grievances have been received by the Board from many taxpayers that in their cases the deductor has deducted tax at source from payments made to them in accordance with the provisions of Chapter-XVII of the Income-tax Act, 1961 (hereafter ‘the Act’) but has failed to deposit the same into the Government account leading to denial of credit of such deduction of tax to these taxpayers and consequent raising of demand.
2. As per Section 199 of the Act credit of Tax Deducted at Source is given to the person only if it is paid to the Central Government Account. However, as per Section 205 of the Act the assessee shall not be called upon to pay the tax to the extent tax has been deducted from his income where the tax is deductible at source under the provisions of Chapter- XVII. Thus the Act puts a bar on direct demand against the assessee in such cases and the demand on account of tax credit mismatch cannot be enforced coercively.
3. This may be brought to the notice of all the assessing officers in your region so that if the facts of the case so justify, the assessees are not put at any inconvenience on account of default of deposit of tax into the Government account by the deductor.
4. This issues with the approval of Chairperson, CBDT.
Yours faithfully
(Sandeep Singh)
Under Secretary to the Govt. of India
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These instructions no doubt provide some sort of relief to the harassed tax payers, but unfortunately do not provide solutions to all the problems encountered by the assessees for the following reasons:
- If the tax deducted at source is not remitted to the government by the deductor, the taxpayer will not get the TDS certificate in respect of this tax paid by him. In such a case, it is not clear as to how this tax will deducted by his employer be included in his return of income in the absence of a TDS certificate for the tax so deducted.
- In the absence of TDS certificate, will the Income Tax officer accept the TDS shown in the pay-slip of the employee and give credit for such tax deducted at source? The government should evolve a method by which the taxpayer should get credit for the tax so deducted, though not remitted to the government, by the deductor.
- Since the tax deductor is de-facto and de-jure an agent of the government and under the present laws the principal, namely the government, is legally liable for all actions of the agent, the taxpayer should not be made to suffer for the failure of the agent (deductor) to remit the TDS into the government coffers.
- The aforesaid CBDT instructions only specify that the demand, if any, on account of mismatch cannot be enforced coercively. If the demand itself is not in order, where is the question of enforcing it coercively or otherwise? In all fairness CDBT should revise these instructions to say that no demand should be sent to the extent of the tax that has been deducted but not remitted to the government by the deductor.
- In case the tax payer is entitled for a refund after accounting for the TDS for which he is not having a TDS certificate, it is not clear whether the ITO will release the refund due, as the CBDT instructions are only not to enforce the tax demand but is silent about the refund, if any, due to the tax payer.
- At present, there is no column in the tax return where the taxpayer can mention the details of tax deducted at source, but not shown in Form 26AS due the failure of the deductor to remit the tax to the government. CBDT should include a separate column for all such contingencies with the name and address of the deductor who has not issued the TDS certificate for no fault of the tax payer.
It is, therefore, necessary for the CBDT to give clear-cut instructions to the Income tax officers in all the above matters and ensure that the taxpayer does not have to suffer on account of the failure of the government to collect the tax from the tax deductor, who legally collects the tax on behalf of the government but illegally pockets it and dupes the government.
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The author is the financial analyst writing for Moneylife under the pen-name ‘Gurpur’)
We had Put a RTI request on IT requesting the details of prosecution and actions taken on the employer to recover the TDS , for which promptly replied as third party information cannot be disclosed.